I hereby give you notice under section 51(3) of the Inland Revenue Ordinance that you are required to produce to me within the offices of the Commissioner within 21 days from the date of this letter the following further information to support your Profits Tax Return for the Year of Assessment 2005/06 :-

An organization chart and details of the Company’s establishments in Hong Kong and overseas. This should include the location and size of the office, the number of employees and their respective name, post title, duties and remuneration package.

A detailed description of the functions carried out by the Company in order to earn the commission income. For each of the activities identified, specify the name of the responsible person and the place where such activity was performed. This analysis should include:

how the buyer/supplier was contacted;

how the price of the goods was negotiated;

how the sales/ purchase contract was prepared and signed;

how the sales/ purchase order was processed;

how the goods was stored and delivered to the buyer.

A copy of the service agreement with each of the commission payers.

In respect of each commission payer, details of the following:

the name and address of the payer, and its relationship with the Company, its directors and shareholders;

the type of goods being purchased/ sold;

the name and address of the corresponding buyer/ supplier; and

the basis of computing the commission.

Details of the largest amount of the commission earned during the year ended 31 December 2005 and analysis of each step of the significant activities carried out by the Company in earning the income, into the place of the service and the name of the responsible person.

A full indexed set of documents for the transaction described in 5. above, including:

correspondence of negotiation with the buyer or supplier;

the sales/purchase contract and orders subsequently effected;

a travel schedule of each of the responsible persons, showing (for each trip) the date of departure from Hong Kong, the place and purpose of each visit and the period of stay in that country;

documents executed by the Company on behalf of the commission payer;

the invoice/ debit notes issued by the Company to the commission payer in respect of the services rendered;

the basis of computation; and

the banking and shipping documents.

The reasons that the commission so earned is not chargeable to Hong Kong Profits Tax.

If you fail to comply with this notice, I shall take legal action

Sample 2:

I hereby give you notice under section 51(3) of the Inland Revenue Ordinance that you are required to produce to me within the offices of the Commissioner within 21 days from the date of this letter the following further information to support your Profits Tax Return for the Years of Assessment 2005/06, 2006/07 and 2007/08 :-

Advise how the Company carried out the trading transactions.

Your comment and reasons that trading profit has an ex-Hong Kong source.

For the largest sales transaction in terms of sales value with the largest customer in the year of assessment 2007/08, provide a full indexed set of documents in chronological order, including sales and purchase agreements, purchase and sales orders, order confirmation, correspondence by way of letters, facsimile transmission, emails, invoices, letter of credit and shipping and insurance documents etc.

For the transaction selected above

details of the nature, quantity and value of the products purchased and sold as well as the parties involved;

clear and full version of each document with a brief description of the nature of the document and the parties concerned;

the routing of documents (i.e. the sender and recipient of the documents). By reference to the documents, describe thoroughly how, where and by whom the purchase and sales activities were performed, from negotiations with buyers and suppliers, conclusion of contracts, issue and receipt of sales and purchase orders, confirmation and acceptance of the orders, arrangement of finance, inspection, delivery of goods to final

Gather proof that no income is derived in Hong Kong. We have heard that it is harder for an Internet company to prove.

Upon receiving the offshore tax credit application, the tax department may issue the company a letter with questions. You will need to answer the questions.

Note that the offshore tax credit is granted on a case by case basis. There is no model answer for the tax department’s questions. If the government grants the credit, the company does not have to pay tax to the government. But still, it will need to do the accounting, audit, and tax filing every year. If the government does not grant the credit, then the company will have to pay tax.

Any Hong Kong company that has conducted business must file audited account to the Inland Revenue Department. The first one should be filed 18 months after incorporation, and the subsequent ones are filed every 12 months. The cost of the accounting, audit, and tax filing depends on the number of transactions the company had monthly, the nature of the business, and the turn over. Here are some examples of the cost:

A Hong Kong company that holds a property and receives monthly rent from the property: HKD $3,500 - HKD $5,000

A Hong Kong trading company that buys goods from Asian countries and sell to European countries: HKD $7,000 - HKD $10,000

A Hong Kong trading company that trades by containers as well as sells on the Internet: HKD $12,000

A Hong Kong company that has several stock trading accounts and conducts day trading using the accounts: HKD $26,000

A Hong Kong company that has several stock accounts in different countries and conducted 12 million computerized transactions during the year: HKD $200,000

So the cost varies a lot. For a more precise quotation, the accountant will need to review the bank account statements of the company. If you have more questions about Hong Kong company accounting, audit, and tax filing, please contact us: info@jinetic.com